Drax Group Plc · LSE:DRX
Drax — H1 2016 Earnings Presentation
42 slides from Drax's earnings presentation, Jul 26, 2016
Slide 1: Half Year Results
Half Year Results 6 Months Ended 30 June 2016 26 July 2016
Slide 2: Agenda
Agenda Operations and Business Review Dorothy Thompson Chief Executive Financial Review Will Gardiner Chief Financial Officer The Opportunity for Drax Dorothy Thompson Drax Group plc 2
Slide 3: A Leading Provider of Renewable Energy
A Leading Provider of Renewable Energy Generation EBITDA c.70% of generation from renewable energy c.20% of UK’s renewable electricity £70m Reducing commodity market dependency Retail Underlying Earnings Per Share Sales target achieved, improving profitability 4.2p Biomass Production & Supply Explor
Slide 4: Operations and Business Review
Operations and Business Review
Slide 5: Safe and Sustainable Business
Safe and Sustainable Business Safety Drax Sustainability Principles Maintaining very good safety performance • Strong Group performance 1. Never work in countries that lack • TRIR(1) – 0.17 (H1 2015: 0.33) regulation • Consistently a top quartile performer Sustainability 2. Never cause deforestation
Slide 6: New Realities for Electricity Markets
New Realities for Electricity Markets Changing generation dynamics Demand vs. Maximum Inflexible Capacity 60 Growth of renewables • Increasing intermittent generation 50 8GW coal plant closures 2015-2016 Capacity market & SBR(1) 40 Changing wholesale price dynamics GW 30 Renewables reducing merchant
Slide 7: Commodity Markets Context
Commodity Markets Context Markets remain challenging UK NBP Gas Price 75 Gas – potential for oversupply SUM 15 • Global LNG capacity growing 65 WIN 15 - Peak supply expected 2017/18 SUM 16 55 WIN 16 • Improved UK price outlook for 2016 SUM 17 p/th - Near-term storage issues WIN 17 45 - Coal-to-gas s
Slide 8: Providing c.20% of UK Renewable Electricity
Providing c.20% of UK Renewable Electricity Biomass Generation by Fuel Type H1 H1 H1 H1 Generation c.70% of generation from renewable energy 2013 2014 2015 2016 • Reliable, responsive generation (Net Sales) TWh TWh TWh TWh Coal 11.9 9.9 8.8 3.4 Biomass operations performing well • Unit on planned ma
Slide 9: Haven – Challenger at Scale
Haven – Challenger at Scale Sales volume target achieved Haven Power Sales 16 Haven sales 7.2TWh (H1 2015: 6.8TWh) 14 • Credit-efficient route to market 12 • Skilled manager of power price risk 10 • c.14TWh contracted for next 12 months TWh • Sales of £643m (H1 2015: £629m) 8 13.8 6 11.8 H1 2016 per
Slide 10: Major Producer of Compressed Wood Pellets
Major Producer of Compressed Wood Pellets Existing US operations working well Morehouse Pellet Plant Port facility • Good operations Pellet plants • Production in line with plan • Optimising fibre usage and pellet production - Fibre cost, pellet quality and profitability • Providing supply chain fle
Slide 11: Regulatory Horizons
Regulatory Horizons New government New opportunity to make the case Biomass CfD – State aid • Consultation complete – awaiting final decision CMA recommendations • Technology neutral competition in future CfD auctions Most affordable large scale renewable • Awaiting whole system cost analysis by DBE
Slide 12: Financial Review
Financial Review Will Gardiner
Slide 13: H1 2016 Financial Highlights
H1 2016 Financial Highlights EBITDA Net Debt(2) £70m £85m (H1 2015: £120m) (December 2015: £187m) H1 2016 Underlying EPS(1) Good performance in a tough environment 4.2p • Challenging commodity markets (H1 2015: 10.2p) • Impact of LEC removal • Growth of Ancillary Services • Good balancing market per
Slide 14: Drax Group – EBITDA Bridge
Drax Group – EBITDA Bridge 140 120 LEC 100 30 80 £m Commodity Price 60 120 50 14 14 40 70 20 0 (1) (2) H1 2015 EBITDA Generation Margin Ancillary Service Other Margin Opex H1 2016 EBITDA Revenue 1) Generation Margin includes net revenue (including sales to Haven Power), net fuel cost (cost of coal a
Slide 15: Adding Value in a Volatile Market
Adding Value in a Volatile Market H1 2016 Balancing Market Prices 600 500 400 £/MWh 300 200 100 0 01-Jan 31-Jan 01-Mar 31-Mar 30-Apr 30-May (100) Drax added c.£25m of additional revenues in H1 2016 Drax Group plc Source: Elexon 15
Slide 16: Improved Quality of Earnings
Improved Quality of Earnings Coal generation Biomass generation Focus on short-term markets Fuel • Limited power hedge • Long-term fixed formula contracts - Weak forward prices • Rolling five year FX hedges - Lower level of generation - Reduced reliance on margins ROC units – strong hedge • Potentia
Slide 17: Increasingly Stable Earnings Profile
Increasingly Stable Earnings Profile Broader earnings streams, lower volatility and contract based revenues Illustrative Historic Earnings Illustrative Future Earnings Spread Other Spread Spread • Coal generation • Coal and ROC generation Other Other • Ancillary Services • CfD generation • Ancillary
Slide 18: Adapting Costs to the Operating Environment
Adapting Costs to the Operating Environment Operating costs £112m in H1 2016 2015 - 2016 Operating Cost Development and Guidance • Decrease of £2m vs. H1 2015 270 - Includes major outage in H1 2016 260 FY 2016 guidance £230m - c.£240m 10 (20) • Increase in US operations: +£5m 250 5 • Two major plann
Slide 19: Group Cash Flow & Working Capital Management
Group Cash Flow & Working Capital Management 400 350 300 88 2 (48) (9) 250 (2) 235 70 £m 200 150 134 100 50 0 Opening EBITDA Working Tax Capex Debt Dividends Closing Cash (1) Capital Payments Service Cash(1) / Other Net Debt Net Debt £187m £85m 1) Cash and cash equivalents plus short-term investment
Slide 20: Group Capex
Group Capex Biomass transformation will be delivered in 2016 – in line with original cost guidance £650m - £700m • Three unit conversions, US pellet investments and IED(1) compliance Capex – £38m in H1 2016 2016 total capex guidance c.£80m - c.£100m • Includes IED compliance and biomass optimisation
Slide 21: Strong Financing & Risk Management
Strong Financing & Risk Management Term Loan Maturity Profile Debt facilities 350 £325m of term loans 300 • Smooth repayment profile 250 £400m working capital and LC(1) facility 200 • Refinanced December 2015 – matures in 2019 £m • Improved pricing 150 100 Commodity trading line 50 Credit rating BB+
Slide 22: Financial Summary and Outlook
Financial Summary and Outlook Good operational performance in a tough environment Biomass Infrastructure at Drax • Challenging commodity markets • Impact of LEC removal • Growth of Ancillary Services • Good balancing market performance • Improved retail and biomass supply profitability • Strong cost
Slide 23: The Opportunity for Drax
The Opportunity for Drax Biomass supply Major producer of compressed wood pellets • Assessing supply chain opportunities - Ambition for 20-25% of generation requirement from self-supply - Sales to third parties Biomass generation Secure, affordable and clean electricity • Ready to convert further un
Slide 24: Questions
Questions
Slide 25: Appendices
Appendices 1. Definitions Dust Extraction System 2. IAS 39 Treatment 3. Group Income Statement 4. Generation – Gross Profit 5. Retail – Gross Profit 6. ROC Reporting 7. Tax Reconciliation 8. 2016 Financial Guidance 9. Power Market 10. Gas Market 11. Coal Market 12. Carbon Market 13. Forward Spread M
Slide 26: Appendix 1: Definitions
Appendix 1: Definitions API2 is the main reference price (including cost, freight and insurance) for steam coal to be delivered to Amsterdam, Rotterdam and Antwerp. API4 is the reference price for steam coal to be delivered free on board API2/4/6 (“FOB”) to Richards Bay, South Africa. API6 is the re
Slide 27: Appendix 1: Definitions (cont.)
Appendix 1: Definitions (cont.) LNG LIQUIFIED NATURAL GAS The frequency rate calculated on the following basis (number of accidents/hours worked * 100,000). Accidents LTIR LOST TIME INJURY RATE are defined as occurrences where the injured party is absent from work for more than 24 hours. One of the
Slide 28: Appendix 2: IAS 39 Treatment
Appendix 2: IAS 39 Treatment Financial Instrument Location of Gains and Losses in the Half Year Report Power Hedge Reserve International Coal Hedge Reserve and Income Statement Financial Coal Largely Hedge Reserve Foreign Exchange Hedge Reserve and Income Statement Carbon Hedge Reserve Gas Income St
Slide 29: Appendix 3: Group Income Statement
Appendix 3: Group Income Statement In £m H1 2016 H1 2015 ▲% Revenue 1,487 1,511 Cost of Sales (1,305) (1,277) Gross Margin 182 234 Operating Costs (112) (114) EBITDA 70 120 (42)% IAS39 Unrealised Gains / (Losses) on Derivative Contracts 163 (3) Depreciation (52) (50) Operating Profit 181 67 Net Fina
Slide 30: Appendix 4: Generation – Gross Profit
Appendix 4: Generation – Gross Profit In £m H1 2016 H1 2015 ▲% Key Metrics Revenue(1) Net sales volume and average Power Sales 970 1,090 achieved price - 2016: 10.9TWh (£47.1/MWh) ROC/LEC Sales 190 145 - 2015: 14.0TWh (£49.9/MWh) Ancillary Services Income 20 6 Fuel Sales - - Cost of coal and biomass
Slide 31: Appendix 5: Retail – Gross Profit
Appendix 5: Retail – Gross Profit Key Metrics In £m H1 2016 H1 2015 ▲% Retail sales Revenue 643 629 2% - 2016: 7.2TWh (£89.3MWh) - 2015: 6.8TWh (£92.5/MWh) Cost of Sales Cost of Power Purchases (339) (353) Power purchases Grid Charges (149) (143) - Increase reflects sales growth at a lower cost per
Slide 32: Appendix 6: ROC Reporting
Appendix 6: ROC Reporting Balance sheet reconciliation H1 2016 Balance Sheet – ROC Assets • ROC generated – estimated benefit of generating ROC and LEC Assets £m electricity with biomass • Sold or utilised – original estimated balance sheet At 31 December 2015 270 value charged to cost of sales on s
Slide 33: Appendix 7: Tax Reconciliation
Appendix 7: Tax Reconciliation UK corporation tax (CT) rates Tax Reconciliation • 20% for 2016 and 20.25% for 2015 Reported Underlying In £m (unless otherwise stated) H1 H1 H1 H1 2016 tax rate 2016 2015 2016 2015 • Underlying rate excludes after tax impact of unrealised gains and losses on derivativ
Slide 34: Appendix 8: 2016 Financial Guidance
Appendix 8: 2016 Financial Guidance Summary Group Opex c.£230m – c.£240m Group Capex c.£80 – c.£100m Depreciation c.£110m – c.£115m Net Interest(1) c.£10m – c.£15m Underlying Tax(2) Small tax charge 1) Net interest remains subject to revaluation of US dollar denominated balances following depreciati
Slide 35: Appendix 9: Power Market
Appendix 9: Power Market UK power market Power Prices 65 Challenging commodity markets driven by oil and gas 55 • Improvement in Q2 2016 reflects stronger gas SUM 15 WIN 15 and expectations of winter tightness SUM 16 £/MWh 45 Dispatch dynamics WIN 16 • Reduction in coal plant generation due to lower
Slide 36: Appendix 10: Gas Market
Appendix 10: Gas Market Global gas Global Gas Prices 20 • Delays / disruptions supporting spot price 18 • Lower oil prices filter through to gas 16 contracts with an oil-indexation element 14 • Narrowing spread between Asia and Europe 12 $/mmbtu 10 • US LNG exports from Q1-16 8 6 US gas 4 • Key driv
Slide 37: Appendix 11: Coal Market
Appendix 11: Coal Market UK coal production and demand falling Coal Prices (API 2) 100 • Coal fired power station closures and lower spreads have reduced requirements 90 • UK coal net imports Q1 2016 fall to 2.6mt 80 Cal 15 - 77% reduction year on year 70 Cal 16 $/tonne Cal 17 Global coal markets re
Slide 38: Appendix 12: Carbon Market
Appendix 12: Carbon Market Phase III EU ETS EUA Carbon Prices • MSR(1) approved, commences January 2019 10 - Polish legal challenge 9 • Market oversupply remains at c.2.1bn 8 Dec-14 €/tonne Dec-15 Phase IV EU ETS 7 Dec-16 • COP21 in Paris outcome does not require any 6 Dec-17 changes to EU ETS Phase
Slide 39: Appendix 13: Forward Spread Movements
Appendix 13: Forward Spread Movements Dark Green Spread Green Spark Spread 20 9 8 7 15 6 5 10 £/MWh 4 £/MWh 3 5 2 1 0 0 (1) (5) (2) Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Summer 15 Winter 15 Summer 16 Summer 15 Winter 15 Summer 16 Winter 16 Summer 17 Wint
Slide 40: Appendix 14: Commodity Price Movements
Appendix 14: Commodity Price Movements Power Prices Coal Prices (API 2) 65 10 9 55 SUM 15 WIN 15 8 Dec-14 €/tonne SUM 16 Dec-15 £/MWh 45 WIN 16 7 Dec-16 SUM 17 6 Dec-17 WIN 17 35 5 25 4 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Sources: Brokered Trades, Spec
Slide 41: Appendix 15: Coal Capacity and IED
Appendix 15: Coal Capacity and IED Installed Capacity Operational Supplementary Balancing IED(1) Installation Operator Fuel Closure - Status (GWe) in 2017 (GWe) Reserve Decision Rugeley Engie Coal 1.0 - Closed summer 2016 - TNP(2) Ferrybridge Scottish & Southern Energy Coal 2.0 - Closed March 2016 -
Slide 42: Half Year Results
Half Year Results 6 Months Ended 30 June 2016 26 July 2016